How (Not) to Measure Competition

J. Boone, J.C. van Ours, H.P. van der Wiel

Research output: Working paperDiscussion paperOther research output

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Abstract

We introduce a new measure of competition: the elasticity of a firm’s profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competi- tion. Using firm-level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high policy relevance. So, just when it is needed the most PCM fails whereas PE does not. From this we conclude that PE is a more reliable measure of competition.
Original languageEnglish
Place of PublicationTilburg
PublisherTILEC
Number of pages49
Volume2007-014
Publication statusPublished - 2007

Publication series

NameTILEC Discussion Paper
Volume2007-014

Fingerprint

Elasticity
Profit
Price-cost margin
Firm-level data
Costs

Keywords

  • competition
  • profit elasticity
  • measures of competition
  • concentration
  • price cost margin
  • profits

Cite this

Boone, J., van Ours, J. C., & van der Wiel, H. P. (2007). How (Not) to Measure Competition. (TILEC Discussion Paper; Vol. 2007-014). Tilburg: TILEC.
Boone, J. ; van Ours, J.C. ; van der Wiel, H.P. / How (Not) to Measure Competition. Tilburg : TILEC, 2007. (TILEC Discussion Paper).
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Boone, J, van Ours, JC & van der Wiel, HP 2007 'How (Not) to Measure Competition' TILEC Discussion Paper, vol. 2007-014, TILEC, Tilburg.

How (Not) to Measure Competition. / Boone, J.; van Ours, J.C.; van der Wiel, H.P.

Tilburg : TILEC, 2007. (TILEC Discussion Paper; Vol. 2007-014).

Research output: Working paperDiscussion paperOther research output

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N2 - We introduce a new measure of competition: the elasticity of a firm’s profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competi- tion. Using firm-level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high policy relevance. So, just when it is needed the most PCM fails whereas PE does not. From this we conclude that PE is a more reliable measure of competition.

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Boone J, van Ours JC, van der Wiel HP. How (Not) to Measure Competition. Tilburg: TILEC. 2007. (TILEC Discussion Paper).